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Smart investing: Creating an all-weather portfolio

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With increasing volatility in the markets, the ongoing Russia-Ukraine conflict and spiraling inflation, investors are changing their investment strategies so as to create an all-weather portfolio. The objective of an all-weather portfolio is to navigate the vagaries of economic, business and asset cycles. They are moving away from a single investment style and/or a buy-and-hold framework to a multi-investment style and/or core and satellite framework.

Prashant Joshi, co-founder and partner, Fintrust Advisors, says, “The advantage is it removes the classic source of performance leakage from an inadvertent single investment style and buy-and-hold approach, which can be short, mid or long term.”



What is an investment strategy?



An investment style/strategy often describes the overarching approach taken by the fund manager when assembling a portfolio of assets. Investment strategy, Joshi explains, “provides some insight into which risks and returns investors are likely to be exposed to and what the drivers of those returns are likely to be.”

The four most known investment styles are value, growth, quality and momentum. Investment styles can be divided and further sub-divided into a host of different, and often highly esoteric, ones such as quality, momentum, cyclical, dividend growth, deep value, event-driven, special situations, to name a few.

How it helps investors

Investment strategies help investors choose where and how to invest as per their expected return, risk appetite, time horizon and preferred investment styles. It is governed by a set of rules and procedures created to guide investors in designing their investment portfolios.

For instance, a barbell investment strategy means a value style and a growth style at the two ends. Having three equal buckets of value, growth and momentum is a bucketing strategy, and having value style at core and momentum style as the satellite is core and satellite strategy.

Barbell investing involves investing in the two extremes. For example, high-risk and no-risk assets while staying away from those in the mushy middle to balance risk and reward. However, experts say, the emergence of various investment styles has made it a challenging environment to have a barbell strategy.

Joshi of Fintrust Advisors points out, “Investors transition to bucketing style strategies where investments are held in three or more investment styles that they understand and relate to. Many family offices and ultra HNIs have moved to the so-called core/satellite strategy where core forms the bulk of the portfolio and satellite complements it, which is tactical allocation whereby one takes a relatively higher risk and explores opportunities in order to earn higher portfolio returns.”

Things to keep in mind

There is no one-size-fits-all approach. Within each strategy, the investment styles and their weights can change. “There are various blends of strategy and style that one can construct to make an investment framework,” says Joshi.

Having said that, it is a must to have a thorough understanding of the risk and reward, supported by backtesting, scenario analysis, and other empirical evidence.

Anup Bansal, chief investment officer, Scripbox, says, “An investor should evaluate the riskiness of a fund’s portfolio before investing and ensure the risk profile is in line with the overall investment strategy. “

Gone are those days when investors built portfolios on an ad-hoc basis without any real grasp of the investment strategy. “People have understood that the right investment style and strategy blend significantly improves their chances of success and is required for an all-weather portfolio.”

INVESTMENT STYLES

— The four most known investment styles are value, growth, quality and momentum
— Investment strategy is the overarching approach taken by the fund manager when assembling a portfolio of assets
— Investment strategies help investors choose where and how to invest as per their expected return, risk appetite and time horizon





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